1099-R reporting and withholding on reissued distribution checks

[JDuns]

An employee age 54 terminates in 1999 with an account balance of $2000. During 1999, the plan issues him a check for $1600 (his full account balance net of 20% withholding) which the employee never cashes.

In January 2000, the plan issues a 1099R showing the distribution ($2000), withholding ($400) and that no exceptions to the 10% early withdrawal penalty apply.

In December 2000, after attaining age age 55, the employee reappears and requests a replacement check.

Which of the following responses do you think are permitted:

(1) Leave the original 1099R alone and reissue the net check (and don't issue a new 1099R for that second check).

(2) Amend the original 1099R to indicate a $400 distribution and $400 withholding actually made, issue a new check for $1240 and issue a new 1099R the following January indicating the $1600 distribution with $360 withholding and no longer subject to the 10% penalty.

(3) Amend the original 1099R to indicate a $0 distribution but $400 withholding, issue a new check for $1600 (no withholding) and issue a new 1099R the following January indicating the $1600 distribution with no withholding or 10% penalty.

[Wessex]

I am assuming that no action was taken to reissue the check in December 2000. (If the check was reissued in December 2000 then answer 1 would be correct.) A corrected 1099-R (showing 0) should be issued for 1999.

Answer 2 seems clearly incorrect, because the participant was not 55 at the time of termination.

Answer 3 doesn't seem correct either. I believe the correct answer is to withhold from the reissued distribution amount and seek a recovery from the IRS (I know, long process) of the amount withheld from the first distribution.

[Guest]

We cope this issue often. The factual question is did the participant receive the check. If he acknowledges receipt then no change to the 1099R would be made. Whether he negotiates the check does not control whether he is in actual receipt of the distribution.

If he actually received the check then the original 1099R is correct and should not be changed.

It is interesting that he only steps forward after attaining age 55. This appears to be a cashout amount and did not have to wait.

Quest, why did he not "rollover" the funds?

[Wessex]

I agree with b2kates as to the treatment if the participant actually received the first check; in my response I was assuming that the participant was contending that he had not received the check.

Unless the participant became 55 in 1999, a distribution received in 1999 or in 2001 would be subject to the 10% penalty tax.

[JDuns]

It appears that all of you concur that

(a) If the individual got the check but did not cash it (for any reason), the distribution was completed and the proper treatment would be to reissue the net check and not change the original 1099r.

(B) If the individual did not receive the distribution, amend the original 1099r to show $0, apply for a refund of the original withholding, reissue the net check ($1600 in the example), redeposit the withholding ($400 in the example) and issue a new 1099r.

Note that (a) is the answer our former TPA applied for all lost participants. None of you suggested the answer recommended by our current TPA (amend the original 1099r to show $0 but withholding, reissue the net check for $1600 and issue a new 1099r with no withholding).

Note also that the new TPA would change the answer on the 10% penalty if the second distribution would qualify even if the first would not have.

Do I need to take issue with the new TPA?

[Wessex]

Yes, I think you need to take issue with the new TPA or preferably seek individual competent advice. I don't see how the "second" distribution could ever be "qualifying" for purposes of an exception to the 10% penalty if the first was not. You look to the year of termination, not the year of distribution, to see if the participant was age 55 or older.